Know Your Enemy: Investing for Retirement

Investing your retirement savings wisely is not all that different from fighting a battle. Unfortunately, too many investors don’t actually know the enemy they’re fighting.

Financial advisors often reinforce these mistaken ideas by comparing portfolio performance to an index such as the S&P 500 Index composed of the stocks of the largest companies in America.

Many investors compare the performance of their portfolios to that of Bob down the street, or more likely, Bob’s idle cocktail chatter. 

Know Your Enemy: Investing for Retirement

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Your opponent in this battle is not Bob. Unfortunately, your enemies are far more worthy. The three enemies of every retirement investor are inflation, taxes, and investment expenses.

Three Enemies of Every Retirement Investor

There is precious little an individual investor can do to actually control the rate of inflation of the goods and service he will purchase over the course of his life.

#1 Beating Inflation

Keep in mind that the rate of inflation that matters is your personal rate of inflation, not necessarily what the government says the overall inflation rate is.

There are many tax breaks available to investors. Long-term capital gains and dividends are taxed at lower rates than regular income.

#2 Beating Taxes

If you lose money in a taxable investment, the IRS will share your pain through tax-loss harvesting. When you die (or receive an inheritance), the investments receive a step-up in basis as of the date of death, allowing the heir to sell them tax-free.

Consider two doctors, each saving $50,000 per year for 25 years in an investment earning 8% per year before expenses. The first pays 2% in investment expenses and the second pays 0.2%, or one-tenth as much.

#3 Minimizing Investment Expenses

After 25 years, the difference in net worth will be nearly a million dollars! Every dollar you pay in fees comes directly out of your investment return.

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